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Posts Tagged ‘joint venture’

Rio concedes BHP ore merger faces hurdles

October 6, 2010 Comments off

“Rio Tinto has conceded that regulatory obstacles are mounting against its ambitious plans to merge its Australian iron ore operations with those of BHP Billiton, its competitor.

The admission came amid growing speculation that the proposed joint venture was being stymied by regulators amid strong opposition from the global steel industry, which fears the plan would give the two multinational miners increased pricing power.

Competition regulators around the world have expanded their scrutiny of the joint venture and pushed back deadlines on their rulings. One Australian media report has claimed the joint venture, first proposed in June 2009, was ‘dead’.”

Source: Financial Times, October 5 2010

Observations:

  • The JV for Pilbara was planned in order to produce more tonnes of iron ore faster, giving both Rio Tinto and BHP Billiton a competitive advantage over competitor Vale.
  • Australian iron ore accounted for 42% of the total iron ore imports of China in 2009. Rio Tinto ships ore from the Western Australian complex via various ports in Dampier and Port Walcott, while BHP uses a port facility in Port Hedland.

Implications:

  • Regulatory approval is unlikely to be given as the production JV would give the companies too much power in the iron ore market in the region. The dominant position of the big 3 and the strong ties the JV would give BHPB and Rio Tinto would increase the risk of price fixing.
  • European regulators typically approve a merger if the new company does not exceed a market share of 40%, and set conditions in case the share is between 40% and 50% depending on the synergies the companies can achieve. American regulators evaluate the level of consolidation in the industry, using the so-called HHI-index. In both systems the JV would certainly exceed the allowable thresholds for parts of the iron ore market. Apparently the Australian regulators agree with this view.

©2010 | Wilfred Visser | thebusinessofmining.com

Rio Tinto signs agreement on mining in Kazakhstan

June 30, 2010 Comments off

“Global miner Rio Tinto signed an agreement on Wednesday with Kazakh state company Tau-Ken Samruk on joint prospecting and mining in the Central Asian state.

Rio Tinto said in June it would be forced to look at investing outside Australia if Canberra pushes ahead with a 40 percent tax on so-called super profits.

Tau-Ken Samruk is the metals and mining arm of Kazakh state investment company Samruk-Kazyna. The chairman of Tau-Ken Samruk, Bolat Svyatov, said the project would produce copper, gold, bauxites, iron ore and other metals.

The Kazakh side would supply rights and permissions, while Rio Tinto will contribute technology to the joint venture created on a parity basis, Tau-Ken Samruk said.”

Source: Reuters, June 30 2010

Observations:

  • The new joint venture is not working on any specific projects yet, but the deal does open doors for Rio to increase activities in Central Asia.
  • Kazakhstan has many good mineral deposits and a rather stable government. However, transportation costs are high, as all transport to the demand regions (Russia & China) has to be done by train.

Implications:

  • Rio will have to strongly manage any production activities that will be undertaken by the JV. Managing operating costs has certainly not been the strength of the Kazakh companies so far. As Rio wants to improve operating margin, they will have to do more than just provide technology to ensure low cost production.
  • The Kazakh deal can be seen as part of Rio’s attempts to increase exploration efforts targeting copper and iron ore.

©2010 – thebusinessofmining.com

ACCC decision on Rio-BHP JV due July 22

June 22, 2010 Comments off

“Australia’s competition watchdog has set a July 22 deadline to review a proposed $US116 billion ($A132.8 billion) iron ore joint venture between BHP Billiton Ltd and Rio Tinto Ltd.

The Australian Competition and Consumer Commission, which began its probe in December, had been due to rule on the joint venture on May 27 but postponed its decision to seek more information from the miners without giving a timeframe for a ruling.

The commission’s website said on Monday that July 22 was now a ‘proposed date’ for an announcement on its findings.”

Source: Business Spectator, June 20 2010

Observations:

  • The Joint Venture is planned to achieve $10 bln in synergies (NPV, thus spread over a long period), a large part of which is achieved by combining transportation infrastructure from the remote Pilbara mines to the iron ore port.
  • Although the Australian watchdog will come with a decision this summer, the European Commission will take much more time to decide on the effects of the JV for the European market.
  • The most likely result from the negotiations of the miners with the government will be an approval of the JV with the condition of a royalty increase.

Implications:

  • Both of the miners are strongly committed to getting the joint venture operational quickly, as they need the additional capacity from the mines in order to retain their market share in the coming years. The proposed increase in resource tax has further increased the necessity of reducing fixed costs in a joint venture agreement.
  • The joint venture between Rio Tinto and BHP Billiton would further increase the risk of implicit pricing arrangements in the iron ore industry. In order to please the regulators, the miners have decided on individually marketing the iron ore. However, organizational ties among the oligopolic producers reduce the transparency of the market. This might be a reason for the European watchdog to impose stricter constraints on the deal.

©2010 – thebusinessofmining.com